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Self’s assessment: taxing smartphones

In our continuing series, Heather Self reviews the tax issues that make the headlines in the national press. This week: why taxing smartphones to fund the arts might not be such a good call.

Let’s tax smartphones to fund the arts, said a group of well-known actors in a letter to The Times (29 June 2021). A ‘small levy’ on the price of each smartphone could produce £250m to £300m in much-needed funding, said Olivia Colman, Imelda Staunton, Celia Imrie and others.

Much as I admire the actors concerned, and thoroughly agree that the arts need more funding as we emerge from the pandemic, it probably won’t surprise you to find that I think this is a bad idea. Indeed, just three days later Harry Wallop, a consumer journalist also writing in The Times (2 July 2021), disagreed robustly with the proposal. While he is not against more funding for the arts (including some public funding) his overall conclusion is that ‘taxing gadgets to pay for it is a monumentally bad idea, which manages to be both Luddite and illogical.’

He points out that the idea that technology is depriving theatres of revenue goes back at least to the days of radio. It is not those who are streaming content who are the problem, but the tech giants such as Amazon, Spotify and Netflix who are ‘making huge sums’ and ‘need to cough up’.

Simple, isn’t it? Please don’t tell the OECD, which has just arrived at a tentative solution for taxing digital businesses, after years of hard work. And he is probably not aware that we already have a 2% digital services tax in the UK, which by all accounts is being passed on directly to consumers in many cases. So I wouldn’t be in favour of a tax on digital giants to fund the arts either.

At a more basic level, there are a few problems with the proposed levy on smartphones.

The first is that, yet again, the tax system would become more complicated to raise a sum of money which, while significant for the arts, is small in the overall government arithmetic at less than 0.5% of total annual tax receipts.

Second, if this is a hypothecated tax, it leads into the usual problem that hypothecated amounts can go up as well as down: what happens when people stop buying smartphones because the technology has moved on?

Third, if we are going to have a levy for the arts, what other special interest groups will want a levy to support their needs? A levy on pet foods to support farmers, or on ice cream to help schools, perhaps?

At a more basic level, there are a few problems with the proposed levy on smartphones.

Tax is often the first suggestion when money is needed for a particular sector, but it’s often an inefficient way to solve a problem and leads to special pleading and massive complexity. The US tradition of ‘pork barrel politics’ goes back to at least 1817, and often leads to ludicrously specific tax breaks being introduced into a Bill in order to gain the vote of a particular senator or congressman. In the UK, successive chancellors have regularly pulled small fluffy rabbits out of the hat at the end of a Budget Speech – the £10 Christmas bonus for pensioners springs to mind – with a similar aim in relation to specific groups of voters. And tax breaks directed at a specific group are often not well-targeted at those groups; I was not impressed with the abolition of VAT on sanitary products, for example (Tax Journal, 15 January 2021).

Of course, specific tax breaks to encourage the creative industry have been tried before – notably the various film scheme incentives over the years. And experience of the increasingly complex structures, many of which are still wending their way through the courts, shows that even a specific tax break, introduced with the best of intentions, is likely to drive behaviour in a way that is not quite what the government intended or wanted.

Sometimes, levies do work – but that is generally when they are so-called Pigouvian taxes, introduced to change behaviour rather than with a primary aim of raising money. The plastic bags tax is a recent example, and the increased duties on leaded petrol a few years ago triggered a significant change to unleaded fuel.

So, if we want, say, an additional £300m for the arts, what would be a better way to raise it? It could be allocated out of general funds, or Lottery money, or perhaps the temporary reduction in VAT which has been given to the food and drinks sector could be extended to theatre and cinema tickets. In each case, the funding would come from an existing source, rather than adding a relatively small additional tax which would add disproportionately to complexity.

Perhaps what we need to do is to step back and look at the tax system as a whole, and drive a better understanding of how it works in order to make better decisions about tax policy. As Polly Toynbee in The Guardian said recently (14 June 2021), if we understood taxes better, we might vote for them to be fairer. The Institute for Fiscal Studies is continuing to do sterling work in this area, and recently launched its TaxLab which is full of useful summaries and videos (see). The Guardian article provides a good overview, but I’d encourage you to find time to look at the TaxLab website itself – and use it to start a better discussion about what sort of tax system we want to have.

First published in Tax Journal on 8 July 2021.

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